11th April 2017 at 7:00am
Article 50 – the official notification of the UK’s withdrawal from the European Union (EU) – has now been triggered by Prime Minister Theresa May.
This historic move begins potentially several years of complex political negotiations. We have a look at what this may mean for markets, and more specifically your investments.
Following the unexpected result of last year’s referendum, there was a period of significant volatility in financial markets – not only in the UK but also further afield. The pound also experienced an immediate and substantial fall in value against other currencies, and it remains at its lowest level since 1985 against the US dollar.
But there have also been positives. Many stock markets, including in the UK, experienced strong returns over the course of 2016. And the weak pound, although not great for UK holidaymakers abroad, has supported UK businesses who export their goods as well as those which operate abroad – find out more about this in my recent blog on how currency movements can affect your investments.
What next for markets?
Brexit negotiations are a step into the unknown – no one can second-guess what the final outcome will be. What’s more certain is that there will be periods of volatility in markets over the next couple of years as negotiations progress. The extent and frequency of these though will depend on what’s agreed – or not agreed, as the case may be.
Standard Life Investments highlights decisions on trade agreements as an area to watch closely. Stephanie Kelly, Political Economist, says: “Overall, the closer UK relations with the EU resemble actual membership, the less disruptive it will be for trade and associated activity. The most disruptive outcome would be a fall back on WTO (World Trade Organisation) rules, which would imply material rises in both tariff and non-tariff barriers.”
Andrew Milligan, Head of Global Strategy at Standard Life Investments, also expects sterling to be volatile – “reacting to a combination of economic developments and political risks, both in the UK and Europe.”
Following on from this, it’s important to remember that Brexit isn’t the only factor affecting markets. This year’s elections in France and Germany, the ongoing political uncertainty in Italy and a further potential bailout for Greece are all causing concerns for investors.
Meanwhile, across the globe there’s a watching brief on the impact of President Trump’s policies. As Andrew Milligan said in his 2017 market view: “we fully expect that political strains and stresses will continue to affect a wide range of European countries and other parts of the world.”
You can keep up to date on what’s happening in markets both in the UK and around the world in Andrew’s monthly market view on our MoneyPlus blog.
What this means for you
As ever during periods of volatility, it’s important to remember these three golden rules:
- Stay calm and take a long-term view
- Avoid locking in short-term losses by selling out of your investments
- Make sure you’re properly diversified.
You may already have a diversified portfolio that includes different types of investments across different countries. And if an investment professional, such as a fund manager, looks after this portfolio on your behalf, they’ll assess the impact of Brexit negotiations, along with other factors, and make investment decisions that are in the best interests of you and other customers.
Standard Life Investments not only looks at what’s happening in the wider economy and markets, but also analyses regions and sectors when making investment decisions on behalf of its customers. It’s currently selective about UK and European equities – in the UK, certain companies, particularly those with overseas exposure, are attractive, while economic growth in Europe is generally having a positive impact on companies’ earnings potential.
The US is the region it currently favours most heavily for equity investments because of the buoyancy in this market on the back of President Trump’s promises on business deregulation and tax cuts.
If you actively manage your own investments, it’s a good idea to regularly review them to make sure your choices still meet your needs and your original reasons for investing are still valid.
Some of the questions you might want to ask yourself are: am I suitably diversified to help shelter my money from significant volatility; did I deliberately invest in a riskier single asset class or region; (if so) is this still right for me in the current market environment?
What this means for your pension investments
If you’re investing to build up your pension savings, then remember that if you’re still some years from retirement, they’ll have time to recover from any short-term losses.
If you’re getting closer to retirement, the most important thing to do is make sure you’re in investments designed to get your pension savings to where they need to be by the time you retire – whether that’s buying an annuity, taking it all as a lump sum, or keeping it invested and taking a flexible income.
If you’re already retired, there are ways to help protect your money not just from market volatility, but throughout your retirement. My colleague Jenny Holt looks at how.
The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in April 2017. Please remember that the value of your investments can go up or down, and may be worth less than you paid in.